Tax Planning for

International Investment

Jonathan C. Blaine, Esq.

(LLM, JD, CPA, MCSI)
Director – Tax
DFDL (Thailand) Ltd.
Spring 2021
 TOPICS
Topics
 What is Tax?
 What is Taxable Income?
 How do we analyze and plan for taxes (Timing/
Charater/Source)?
 What about International Taxation?
 What are Double Taxation Agreements (“DTA”)
?
 What examples International Investment Strate
gies
 Indian investment via Mauritius
 Permanent Establishment: Lone Star Funds and KEB
 Securitization in Ireland: Lehman and Korea NPL’s
 TOPICS
What is Tax?
 Social Contract View
 The costs of living in a society
 Libertarian View
 Theft of one’s property/form of slavery
 Statutory in Nature = imposed by government
 Should not be informal payments (quasi bribes)
 Judge Learned Hand:
“Anyone may arrange his affairs so that his taxes shall be as low as p
ossible; he is not bound to choose that pattern which best pays the t
reasury. There is not even a patriotic duty to increase one's taxes. Ov
er and over again the Courts have said that there is nothing sinister i
n so arranging affairs as to keep taxes as low as possible. Everyone d
oes it, rich and poor alike and all do right, for nobody owes any publi
c duty to pay more than the law demands.” - Gregory v. Helvering 69 F.2d
 TOPICSIncome?
What is Taxable
 Income = economic gain
 Two definitional approaches:
1. Definitional approach: only that income expressly include
d
2. Comprehensive income approach: any benefit is income u
nless excluded by law
 Income is net of expenses associated with the i
ncome
 Accrual v. cash based accounting for income ta
xes
 Timing can be used to reduce taxes by moving
expenses forward and deferring income to a lat
er period
 TOPICS
How do we analyze and plan for taxes?
 Income and Expense can be analyzed based on:
1 . Timing
2 . Character
3 . Source
 Timing = When to recognize income or expense?
 See previous slide
 Recognized v. realized
 Examples = Capital Gains, Partnerships
 Character = What type of income is it?
 Capital gain v. Ordinary income
 Diviend v. Interest
 Example = Hybrid instrument for financing
 Souce = Where is the income from? (See next slid
 TOPICS Taxation?
What about International
 Residency = Where the “person” is subject to ta
x
 Source = Where the income is derived
 What about double taxation?
 SUBSIDIARY EXAMPLE:
Income $100
USPC
Local (Source) taxes (20) Dividends O
Available for distribution 80
Taxes (Resident) @ 35% (35) FSUB
After tax return $ 45

TOTAL TAXES PAID = 55% INCOME

20% More than if earned at home!

What are Double Taxation Agreements
TOPICS
(“DTA”)?
 How do we address the double tax problem?
 Source country = Withholding Taxes; and
 Resident country = Foreign Tax Credits (FTC’s)
 SUBSIDIARY EXAMPLE:
Income $100 Taxes (Resident) @ 35% of Gross 35
Local (Source) taxes (20) Less: Credit taxes paid in Source (28)
Available for distribution 80 Taxes due to Resident 7
Witholding Taxes 10% (8)
Tax due to home country (7)
After tax return $65

TOTAL TAXES PAID = 35% The same as if the income were earned at ho
me.
 Double Taxation
TOPICS Agreements
(Problems/Opportunities)

 Aim is to reduce double taxation to promote intern

ational investment (capital neutrality) and efficient
uses of capital?
 “Treaty Shopping” can lead to tax exempt investme
nt.
 Contrary to the spirit of these agreements.
 Treaties rely on definitions of charater and source:
1. Dividends paid by a company resident in one country to a
beneficial owner resident in the other country are subject
to taxation by source country at reduced rates.
2. Interest arising in a country and paid to beneficial owner i
n the other country is subject to taxation by source countr
y at reduced rates.
3. Business Profits = Onlytaxable in source country if earned
 Double Taxation
TOPICS Agreements
(Problems/Opportunities)

1. Apple (Ireland and EU)

2. Indian investment via Mauritius
3. Permanent Establishment: Lone Star Funds and KEB
4. Labuan, Malaysia for Capital Gains& Business Profits: GS,
Newbridge Capital, The Carlyle Group
5. Securitization in Ireland: Lehman and Korea NPL’s
 AppleTOPICS
and the EU
1. Apple has non-resident Ireland companies
2. These companies earn Royalties from EU countries (taxed
at 3%-ish)
3. Paid onward to Bermuda (no-tax)
4. Not returned to US, non US tax
5. Ireland granted lower tax rate (EU complaint as state aid)
 Treaty Shopping?
TOPICS
Indian Investment via Mauritius (Source Example)
 Non-Indian investors wishing to invest in the Indian stock m
arket can do so by setting up a corporation in Mauritius.
 If done correctly, the capital gains on shares traded in India
can be avoided with NO taxes paid to either India or Mauriti
us.
 How is this possible?
 India-Mauritius DTA exempts from Indian taxation any capital g
ains earned in India by a Mauritius Company.
 Mauritius domestic law will grant a license to a company for me
eting minimal requirements.
 Under Mauritius law a company is resident if it is incorporated i
n Mauritius or has its seat of management in Mauritius.
 Foreign investors can invest in Indian shares and avoid Indian ta
xes on capital gains under the treaty.
 Mauritius has no capital gains taxes.
 Mauritius does not impose withholding taxes on dividends.
 Treaty Shopping?
TOPICS
Indian Investment via Mauritius

SOURCE: BUSINESSWORLD INDIA at

http://www.businessworldindia.com/Dec1106/big04.htm
 Permanent Establishment?
TOPICS
Lone Star Funds and Korea Exchange Bank (Source & Character
Example)
 Lone Star Funds (“LSF”) is a US based (Texas) global investm
ent firm.
 LSF set up a subsidiary in Belgium (“LSF-KEB”).
 LSF-KEB holds shares in Korean Exchange Bank (“KEB”), whi
ch LSF purchased at a distressed price during the Asian fina
ncial crisis (2003).
 LSF claimed that:
1 . All the work on the deal was done by LSF, a US company,
and
2 . LSF-KEB, a Belgium based company only held shares, and
3 . Lone Star has no Permanent Establishment in Korea, thus
under the relevant treaties no taxes can be imposed on th
ese business profits.
 Previously, LBS sold the Star Tower building. The NTA claim
ed that sale was subject to taxation under the US-Korea DT
A, which provided for taxation of transactions by Korea if >
Permanent Establishment?
TOPICS
Lone Star Funds and Korea Exchange Bank

LSF
(US)

LSF - KEB Hana

(Belgium) (Korea)
51.2% Shares

KEB KEB
(Korea) (Korea)
 Labuan, TOPICSMalaysia
GS, Newbridge Financial, The Carlyle Group
 Many companies have structured their investments into Korea and
other countries through Labuan, Malaysia
 Labuan is a Special Economic Zone in Malaysia where there are no
taxes imposed on off-shore income from non-trading activities.
 There are no withholding taxes on dividends paid to shareholders
and getting residency is easy so many investment holding compani
es and other investors set-up a company in Labuan and use that c
ompany to funnel investments into countries which have a DTA wi
th Malaysia.
 Goldman Sach’s, Newbridge Financial, The Carlyle Group and othe
rs made extensive use of Labuan for investing in banks, real-estate
and NPL securitization in Korea. By doing so they avoided taxes in
Korea and Malaysia.
 As long as these earnings are permanently re-invested outside the
US, no taxes will ever be paid on these earnings and they will redu
ce taxes on the financial statements of these US based entities und
er APB23…..the topic of a later lecture.
 Securitization
TOPICS Planning
Lehman and Korean NPL’s
 Lehman worked with the Korean government to assist in re
moving Non-Performing Loans from Korean banks.
 Built a structure with Korean Asset Management Corporati
on (“KAMCO”)
 Structure used multiple methods of reducing Korean taxes
1. Set bonds rates artificially high to reduce taxation by subjecting interes
t to withholding taxes and not income taxes.
2. Used a Labuan based management company to provide services to the
Special Purpose Corporations (“SPC’s”) and charged excess fees to redu
ce Korean taxes.
3. Held bonds in SPC’s located in Ireland to reduce taxes on sales of bond
s.
4. Utilized total return swaps as a funding device to avoid thin-capitalizati
on taxation. Providing a guarantee to third-party financing would have
rendered a portion of interest being paid as non-deductible.
5. Taxes would normally be creditable against US tax liability of 35% at a
later date, so why go through all the trouble? All of it was for the bene
fit of the arrangers who stood to make a bonus based on revenues net
 Securitization
TOPICS Planning?
Lehman and Korean NPL’s
LBHI Cash
(US)

LBK Trust
LBHI UK (Ireland)
𐑕𐑕 Branch

Opal
Loan Holdings
(Ireland)
GKI Revival Loan
KAMC Korea Fund Opal SPV
O Limited Management (Ireland)
(Korea) (Labuan) Korea LLC
(US)
Management
Services
Corporate Cash LBGKI Trust Secured Bonds @ 20%
Restructurin (Labuan) Unsecured Bonds @ 25 %
g
Company
Non- GKI
(Korea) Performing Holdings Cash
Loans (NPLs) Limited
(Labuan)

SPV 1 SPV 2
Cash (Korea) (Korea)
 REFORMS
TOPICS

 Renegotiation of treaties to require substance for r

esidence
 Limitations on Benefits articles being added to trea
ties
 “Tax Haven” lists being produced by some countrie
s and OECD
 Minimum taxes paid requirements
 Enhanced tax shelter reporting and monitoring
 Enhanced information sharing agreements (FATC
A and GATCA)
 Participation Exemptions for Foreign Earnings
 Tax Morality = OECD Base Erosion and Profit Shifti
ng
 Google, Amazon, Starbucks = Not Taxes in the UK
How BEPS developments are affecting Thail
and?
Base Erosion and Profit Shifting (BEPS)
 Project that grew out of G20 and OECD to address percei
ved abuses in tax planning and arbitrage structuring
 Inclusive framework including developing country input
 15 Action Items (see next slide)
 Multiple means of participation
1 . Global Forum on Transparency and
Exchange of Information for Tax Purposes
2 . Inclusive Framework
3 . Multi-lateral Instrument (MLI)

 THAILAND joined Global Forum in January 2017 &

The Inclusive Framework in June 2017

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How BEPS developments are affecting Thailand?

ACTION ITEMS
TRANSFER PRICING: INTANGIBLES,
1 DIGITAL ECONOMY
8-10 RISKS & CAPITAL, HIGH-RISK
TRANSACTIONS

2 HYBRIDS
BEPS DATA ANALYSIS
11
3 CFC RULES
DISCLOSURE OF AGGRESSIVE
12 TAX PLANNING
4 INTEREST DEDUCTIONS
TRANSFER PRICING
13 DOCUMENTATION
5 HARMFUL TAX PRACTICES

DISPUTE RESOLUTION (MAP)

6 TREATY ABUSE 14
PERMANENT ESTABLISHMENT
7 STATUS 15 MULTILATERAL INSTRUMENT
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How BEPS developments are affecting Thailand?

MINIMUM STANDARDS
• Modification of DTA’s to prevent Treaty Shopping =
PREVENT (LOBs)
TREATY • Increased scrutiny and substance requirements for CoR
ABUSE

• Require reporting for MNEs with group revenue over

€750 M
C-b-C • Taxable profit, tax payments, business activities,
REPORTING
investment
• Thailand will share information with other Framework
FIGHTING
members
HARMFUL • Regimes, Unilateral APAs, Tax rulings, other Preferential
TAX
PRACTICES Matters
• Domestic and Treaty updating for Mutual Agreement
IMPROVING Procedures
DISPUTE • 24 month resolution period + Tax Arbitration?
RESOLUTION

21